It’s the last week of October, almost planning time for 2010. Our next newsletter will review the planning process, be sure to watch for it.
One thing you need to decide each year is how much salary you will pay yourself. In theory, you should pay yourself as follows:
If you’ve been in business 0 to 4 years: 8% of your total sales. Example:
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$380,000 x 8% = $30,400 salary
$746,950 x 8% = $59,756 salary
If you’ve been in business over 5 years: 10% of your total sales. Example:
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$380,000 x 10% = $38,000 salary
$746,950 x 10% = $76,950 salary
Why pay yourself less in the first 2 years? Because your business isn’t stable yet and you need to be setting aside funds in your Operating Capital Reserve Account.
Two caveats. I know from having talked with over 500 different contractors this year that many have not taken a regular salary this year. It is important to run your business as a business and pay yourself accordingly – but that’s why you keep an Operating Capitol Reserve Account, for the tough times. If you don’t pay yourself a salary, I hope you have an OCRA so you can get paid.
Second, watch carefully how much you pay yourself, the guidelines above are just guidelines. Be darned sure that the amount you take can be supported by your level of sales. If you take more than the company can support, you will experience cash flow problems very quickly.
This is really good advice. My first company (a plumbing business) I took 100% of the profits after overhead and payroll were covered, and when 2 of my general contractors went out of business owing me money, I couldn’t sustain it and went out of business.